UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
811-10083
---------------------------------
Investment Company Act file number
Excelsior Directional Hedge Fund of Funds, LLC
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(Exact name of registrant as specified in charter)
225 High Ridge Road
Stamford, CT 06905
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(Address of principal executive offices) (Zip code)
U.S. Trust Hedge Fund Management, Inc.
225 High Ridge Road
Stamford, CT 06905
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(Name and address of agent for Service)
Registrant's telephone number, including area code: (203) 352-4497
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Date of fiscal year end: 3/31/2006
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Date of reporting period: 9/30/2005
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ITEM 1. REPORTS TO STOCKHOLDERS.
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EXCELSIOR DIRECTIONAL HEDGE FUND OF FUNDS, LLC
Financial Statements
(Unaudited)
Period from April 1, 2005 to September 30, 2005
Excelsior Directional Hedge Fund of Funds, LLC
Financial Statements
(Unaudited)
Period from April 1, 2005 to September 30, 2005
Contents
Statement of Assets, Liabilities and Members' Equity - Net Assets.... 1
Schedule of Investments.............................................. 2
Statement of Operations.............................................. 3
Statements of Changes in Members' Equity - Net Assets................ 4
Statement of Cash Flows.............................................. 5
Notes to Financial Statements........................................ 6
The Registrant files its complete schedule of portfolio holdings with
the Securities and Exchange Commission (the "Commission") for the first and
third quarters of each fiscal year on Form N-Q. The Registrant's Forms N-Q are
available on the Commission's website at http://www.sec.gov, and may be reviewed
and copied at the Commission's Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. Information on Form N-Q is available without charge,
upon request, by calling collect (203) 352-4497.
A description of the policies and procedures that the Registrant uses
to determine how to vote proxies relating to portfolio securities is available
without charge, upon request, by calling collect (203) 352-4497 and on the
Commission's website at http://www.sec.gov.
Information regarding how the Registrant voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available without charge, upon request, by calling collect (203) 352-4497, and
on the Commission's website at http://www.sec.gov.
Excelsior Directional Hedge Fund of Funds, LLC
Statement of Assets, Liabilities and Members' Equity - Net Assets (Unaudited)
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September 30, 2005
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ASSETS
Investments in Investment Funds, at fair value (cost $212,976,530) $263,834,396
Investments in Investment Funds made in advance 10,500,000
Cash and cash equivalents 3,362,375
Receivable for interests in Investment Fund sold 422,774
Other assets 25,564
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Total Assets $278,145,109
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LIABILITIES
Members' Interests received in advance 8,820,000
Bank note payable 3,400,000
Bank note facility fee and interest payable 24,000
Repurchase of members' Interests payable 1,284,926
Due to Adviser 961,325
Professional fees payable 90,881
Board of Managers' fees payable 7,125
Administration fees payable 75,000
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Total Liabilities 14,663,257
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Net Assets $263,481,852
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MEMBERS' EQUITY - NET ASSETS
Represented by:
Capital subscriptions - net $212,623,986
Net unrealized appreciation on investments 50,857,866
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Members' Equity - Net Assets $263,481,852
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The accompanying notes are an integral part of these financial statements.
Excelsior Directional Hedge Fund of Funds, LLC
Schedule of Investments (Unaudited)
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September 30, 2005
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% of First
First Members' % Ownership Available
Acquisition Fair Equity - of Investment Redemption
Investment Funds Date Cost* Value* Net Assets Funds Date ** Liquidity***
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Hedged Long/Short Equity Funds
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Basix Capital Fund, L.P. 7/1/2004 $ 8,500,000 $ 8,446,943 3.21% 10.44% N/A Quarterly
Foundation Partners, L.P. 7/1/2002 8,000,000 9,192,945 3.49% 8.34% N/A Quarterly
SAB Capital Partners, L.P. 4/1/2001 5,000,000 7,080,525 2.69% 0.97% N/A Annually
Scopia PX, LLC 9/1/2005 3,000,000 2,958,600 1.12% 3.96% 11/1/05 Quarterly
Spring Point Institutional Partners, L.P. 1/1/2004 17,000,000 17,836,681 6.77% 6.07% N/A Quarterly
Swiftcurrent Partners, L.P. 10/1/2000 3,550,000 6,011,585 2.28% 1.17% N/A Annually
Tonga Partners, L.P. 10/1/2000 4,060,553 9,758,750 3.70% 3.02% N/A Semi-annually
------------------------------------
Strategy Total 49,110,553 61,286,029 23.26%
------------------------------------
Opportunistic Long/Short Equity Funds
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Alson Signature Fund I, L.P. 10/1/2002 8,748,954 12,159,219 4.61% 8.56% N/A Quarterly
Cadmus Capital Partners (QP), L.P. 7/1/2003 3,500,000 4,114,532 1.56% 2.45% N/A Quarterly
Indus Asia Pacific Fund, L.P. 3/1/2004 6,000,000 6,880,894 2.61% 0.72% N/A Quarterly
Indus Event Driven Fund, L.P. 6/1/2005 9,000,000 9,047,670 3.43% 1.19% N/A Quarterly
Indus Japan Fund, L.P. 3/1/2004 6,000,000 8,030,143 3.05% 0.75% N/A Quarterly
Phinity Capital, L.P. 10/1/2004 14,200,000 16,022,197 6.08% 13.35% N/A Quarterly
Quaker Capital Partners I, L.P. 1/1/2001 6,000,000 12,002,437 4.56% 3.04% N/A Annually
Seminole Capital Partners, L.P. 9/1/2005 3,000,000 3,092,391 1.17% 0.70% 11/1/05 Semi-annually
------------------------------------
Strategy Total 56,448,954 71,349,483 27.07%
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Hedged Sector Funds
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Argus Healthcare Partners, L.P. 11/1/2003 7,000,000 7,774,488 2.95% 5.75% N/A Semi-annually
Coatue Qualified Partners, L.P. 1/1/2002 6,000,000 8,718,440 3.31% 3.70% N/A Quarterly
Durus Life Sciences Fund, LLC 1/1/2001 586,983 700,811 0.27% 2.05% N/A (1)
Endicott Partners II, L.P. 1/1/2003 6,500,000 7,445,802 2.83% 4.28% N/A Semi-annually
Heirloom Qualified Partners, L.P. 4/1/2004 10,000,000 10,641,271 4.04% 7.00% N/A Quarterly
Longbow Partners, L.P. 5/1/2004 10,200,000 11,967,615 4.54% 5.60% N/A Quarterly
Vardon Partners II, L.P. 10/1/2002 9,000,000 10,622,784 4.03% 9.89% N/A Quarterly
------------------------------------
Strategy Total 49,286,983 57,871,211 21.97%
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Arbitrage/Distressed Funds
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Aviator Partners, L.P. 8/1/2004 1,500,000 1,063,845 0.40% 7.75% N/A Quarterly
Canyon Value Realization Fund, L.P. 7/1/2003 9,400,000 12,105,164 4.59% 0.71% N/A Annually
Castlerigg Partners, L.P. 4/1/2004 15,000,000 16,652,257 6.32% 3.05% N/A Quarterly
Farallon Capital Partners, L.P. 11/1/2004 10,000,000 11,482,536 4.36% 0.07% 11/1/05 Annually
JMG Capital Partners, L.P. 10/1/2000 6,750,000 10,782,072 4.09% 1.25% N/A Quarterly
K Capital II, L.P. 1/1/2001 8,000,000 8,613,652 3.27% 2.15% N/A Quarterly
Satellite Fund II, L.P. 10/1/2000 1,230,040 2,669,456 1.01% 0.20% N/A Annually
Stark Investments Limited Partnership 10/1/2000 6,250,000 9,958,690 3.78% 0.48% N/A Annually
------------------------------------
Strategy Total 58,130,040 73,327,673 27.83%
Total Investments in Investment Funds $212,976,530 263,834,396 100.13%
============
Other Assets, Less Liabilities (352,544) -0.13%
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Members' Equity - Net Assets $263,481,852 100.00%
======================
* See definition in Note 2a. N/A Initial lock-up period has either expired
** From original investment date. prior to September 30, 2005 or Investment
*** Available frequency of Fund did not have an initial lock-up
redemptions after initial period. However specific redemption
lock-up period. restrictions may apply.
(1) The Investment Fund is currently in
liquidation and has eliminated partner
withdrawal rights.
The accompanying notes are an integral part of these financial statements.
Excelsior Directional Hedge Fund of Funds, LLC
Statement of Operations (Unaudited)
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Period from April 1, 2005 to September 30, 2005
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INVESTMENT INCOME
Interest $ 183,427
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Total Investment Income 183,427
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OPERATING EXPENSES
Management fee 1,930,264
Professional fees 55,935
Administration fees 101,829
Board of Managers' fees and expenses 26,250
Bank note facility and interest expenses 38,583
Other 95,451
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Total Operating Expenses 2,248,312
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Net Investment Loss (2,064,885)
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REALIZED AND UNREALIZED (LOSS)/GAIN FROM
INVESTMENTS
Net Realized loss from investments in Investment Funds (773,597)
Change in net unrealized appreciation on
investments in Investment Funds 13,304,711
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Net Realized and Unrealized Gain from Investments 12,531,114
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INCREASE IN MEMBERS' EQUITY - NET ASSETS
DERIVED FROM OPERATIONS $10,466,229
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The accompanying notes are an integral part of these financial statements.
Excelsior Directional Hedge Fund of Funds, LLC
Statements of Changes in Members' Equity - Net Assets (Unaudited)
Period from
April 1, 2005 - Year ended
September 30, March 31,
2005 2005
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OPERATIONS
Net investment Loss $(2,064,885) $(3,854,227)
Net realized (loss) gain from investments (773,597) 4,381,777
Change in net unrealized appreciation 13,304,711 10,736,054
on investments
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Increase in Members' Equity - Net Assets
Derived from Operations 10,466,229 11,263,604
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CAPITAL TRANSACTIONS
Members' subscriptions $30,750,906 $76,831,709
Members' Interests repurchased (18,679,067) (21,115,712)
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Increase in Members' Equity - Net Assets
Derived From Capital Transactions 12,071,839 55,715,997
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Net Increase in Members' Equity - Net Assets 22,538,068 66,979,601
MEMBERS' EQUITY - NET ASSETS
AT BEGINNING OF PERIOD 240,943,784 173,964,183
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MEMBERS' EQUITY - NET ASSETS
AT END OF PERIOD $263,481,852 $240,943,784
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The accompanying notes are an integral part of these financial statements.
Excelsior Directional Hedge Fund of Funds, LLC
Statement of Cash Flows (Unaudited)
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Period from April 1, 2005 to September 30, 2005
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CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in members' equity - net assets
derived from operations $10,466,229
Adjustments to reconcile net increase in members' equity -
net assets derived from operations to net cash used in
operating activities:
Change in net unrealized appreciation on investments (13,304,711)
Net realized loss from investments 773,597
Purchases of Investment Funds (40,500,000)
Proceeds from sales of Investment Funds 18,996,363
Decrease in receivables from Investment Funds 295,271
Decrease in other assets 37,192
Increase in due to Adviser 71,063
Increase in bank note fee and interest payable 24,000
Increase in repurchase of Members' Interests payable 318,114
Decrease in professional fees payable (51,510)
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Net Cash Used in Operating Activities (22,874,392)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Members' subscriptions 22,130,806
Payments for Members' Interests repurchased (18,679,067)
Borrowings on bank note payable 3,400,000
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Net Cash Provided by Financing Activities 6,851,739
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Net decrease in cash and cash equivalents (16,022,653)
Cash and cash equivalents at beginning of period 19,385,028
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Cash and Cash Equivalents at End of Period $ 3,362,375
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The accompanying notes are an integral part of these financial statements.
Excelsior Directional Hedge Fund of Funds, LLC
Notes to Financial Statements (Unaudited)
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September 30, 2005
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1. Organization
Excelsior Directional Hedge Fund of Funds, LLC (the "Company") was organized as
a limited liability company under the laws of Delaware on July 6, 2000, and
commenced operations on October 1, 2000. The Company is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a closed-end,
non-diversified, management investment company. The Company seeks capital
appreciation. The Company pursues its investment objective principally through a
multi-manager, multi-strategy program of investments in a diverse group of
investment funds that primarily invest or trade in a wide range of equity and
debt securities. The investment managers selected by the Company generally
conduct their investment programs through investment funds (collectively, the
"Investment Funds") in which the Company invests as a limited partner or member
along with other investors.
U.S. Trust Hedge Fund Management, Inc. serves as the investment adviser of
the Company (the "Adviser"). The Adviser is a wholly-owned subsidiary of
U.S. Trust Corporation, and is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended.
The Company's Board of Managers (the "Board") has overall responsibility to
manage and supervise the operations of the Company, including the exclusive
authority to oversee and to establish policies regarding the management, conduct
and operation of the Company's business. The Board has engaged the Adviser to
provide investment advice regarding the selection of Investment Funds and the
responsibility of the day-to-day management of the Company.
Member ("Member") subscriptions for Interests in the Company ("Interests") by
eligible investors may be accepted as of the first day of each calendar quarter,
or at such times as the Board may determine. The Company may, from time to time,
offer to repurchase Interests from members pursuant to written tenders by the
Members. These repurchase offers will be made at such times and on such terms as
may be determined by the Board, in its sole discretion, subject to the liquidity
of the Company's assets and other factors considered by the Board. The Adviser
expects that, generally, it will recommend to the Board that the Company offer
to repurchase interests from members twice each year, at June 30th and December
31st. Members can only transfer or assign Interests under certain limited
circumstances.
Excelsior Directional Hedge Fund of Funds, LLC
Notes to Financial Statements (Unaudited) continued
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September 30, 2005
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2. Significant Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires that management make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Management believes that the estimates utilized in preparing
the Company's financial statements are reasonable and prudent; however, actual
results could differ from these estimates.
a. Portfolio Valuation
The net asset value of the Company is determined by, or at the direction of, the
Adviser as of the close of business at the end of any fiscal period (as defined
in the Company's Limited Liability Company Agreement), in accordance with the
valuation principles set forth below, or as may be determined from time to time
pursuant to policies established by the Board.
Ordinarily, the Company's investments in Investment Funds are carried at fair
value as determined by the Company's pro-rata interest in the net assets of each
Investment Fund as reported by the investment manager, who determines the value
of the Investment Fund's net assets. The values of the Investment Funds' net
assets are determined in accordance with their valuation policies as described
in their respective offering memoranda or operating agreements. All valuations
utilize financial information supplied by the investment manager of each
Investment Fund, and are net of management and performance incentive fees or
allocations pursuant to the Investment Funds' agreements. The Adviser, or, in
certain cases, the Board, will consider such information, and may conclude in
certain circumstances that the information provided by an Investment Fund's
manager does not represent the fair value of the Company's interests in an
Investment Fund. Following procedures adopted by the Board, and in the absence
of specific transaction activity in interests in a particular Investment Fund,
the Company could consider whether it was appropriate, in light of all relevant
circumstances, to value such a position at the Investment Fund's net asset value
as reported at the time of valuation, or whether to adjust such value to reflect
a premium or discount to net asset value. Any such decision must be made in good
faith, and subject to the review and supervision of the Board. Because of the
inherent uncertainty of valuation, the values of the Company's investments may
differ significantly from the values that would have been used had a ready
market for the investments held by the Company been available.
The Company's investment in Durus Life Sciences Fund, LLC, valued at $700,811
and representing 0.27% of members' equity - net assets as of September 30, 2005,
was fair valued in good faith by the Adviser at a value different than the value
supplied by this Investment Fund's manager. This Investment Fund is in
liquidation at September 30, 2005, and therefore, the Adviser determined the
fair value of the Company's investment based on information provided to the
Adviser. Due to this Investment Fund being in liquidation, there are no ongoing
redemption rights available to partners.
Excelsior Directional Hedge Fund of Funds, LLC
Notes to Financial Statements (Unaudited) continued
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September 30, 2005
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2. Significant Accounting Policies (continued)
a. Portfolio Valuation (continued)
Such Investment Fund's fair value does not reflect any potential contingent
liabilities associated with either the liquidation of the Investment Fund or, if
any, pending litigation against it.
Distributions received from Investment Funds, whether in the form of cash or
securities, are applied first as a reduction of the investment's cost and, if
any, any excess as a realized gain from investments.
b. Company Expenses
The Company bears certain expenses incurred in its business, including, but not
limited to, the following: fees paid directly or indirectly to the investment
managers of the Investment Funds, all costs and expenses directly related to
portfolio transactions and positions for the Company's account; certain legal
fees; accounting and auditing fees; custodial fees; fees paid to the Company's
administrator; costs of insurance; management fee; travel and related expenses
of the Board; all costs with respect to communications regarding the Company's
transactions among the Adviser and any custodian or other agent engaged by the
Company; and other types of expenses approved by the Board.
c. Income Taxes
As a limited liability company, no provision for the payment of Federal, state
or local income taxes has been provided by the Company since each Member is
individually required to report on its own tax return its share of the Company's
taxable income or loss. The Company has a tax year end of December 31.
Net investment income or loss and net realized and unrealized gain or loss from
investments of the Company for each fiscal period are allocated among, and
credited to or debited against, the capital accounts of all Members as of the
last day of the fiscal period in accordance with each Member's respective
investment percentage for the fiscal period, as defined in the Company's Limited
Liability Company Agreement.
Excelsior Directional Hedge Fund of Funds, LLC
Notes to Financial Statements (Unaudited) continued
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September 30, 2005
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2. Significant Accounting Policies (continued)
c. Income Taxes (continued)
The cost of the Company's investments in Investment Funds for Federal income tax
purposes is based on amounts reported to the Company on Schedule K-1 by the
Investment Funds for the year ended December 31, 2004. Based on Investment Funds
owned at December 31, 2004, the cost of investments for Federal income tax
purposes was $218,268,261. This consisted of aggregate gross unrealized
appreciation of $19,426,188 and aggregate gross unrealized depreciation of
$1,290,001.
d. Other
Cash and cash equivalents consist of monies maintained in a U.S. Trust
Company, N.A. custody account, which earn interest at money market rates.
Interest income is recorded on the accrual basis.
3. Management Fee, Related Party Transactions and Other
As of September 30, 2005, the employees and affiliates of the Adviser have a
combined interest of approximately 12.11% of the Company's members' equity - net
assets.
The Adviser provides certain investment advisory services and incurs research,
travel and other expenses related to the selection and monitoring of investment
managers. Further, the Adviser provides certain management and administrative
services to the Company, including providing office space and other support
services, maintaining files and records, and preparing and filing various
regulatory materials. In consideration for such services, the Company pays the
Adviser a quarterly management fee at an annual rate of 1.5% based on the
Company's net assets on the first business day of each quarter after adjustment
for any subscriptions effective on that date. For the period from April 1, 2005
to September 30, 2005, the management fee was $1,930,264, of which $961,325 was
payable as of September 30, 2005.
The Company earned $183,427 of interest income on cash balances maintained at
U.S. Trust Company, N.A., an affiliate of the Company. At September 30, 2005,
the Company had a cash balance of $3,362,375 held by this affiliate.
Excelsior Directional Hedge Fund of Funds, LLC
Notes to Financial Statements (Unaudited) continued
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September 30, 2005
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3. Management Fee, Related Party Transactions and Other (continued)
Each member of the Board (a "Manager"), who is not an "interested person" of the
Company as defined by the 1940 Act, receives an annual retainer of $7,000 plus a
fee for each meeting attended. Any Manager who is an "interested person" does
not receive any retainer or other fee from the Company. The Company incurred
$26,250 of retainer and per meeting fees for the period from April 1, 2005 to
September 30, 2005, of which $7,125 is payable as of September 30, 2005. Also
all Managers who are not "interested persons" of the Company are reimbursed by
the Company for all reasonable out-of-pocket expenses.
The Company incurred $4,000 in fees for the period from April 1, 2005 to
September 30, 2005 related to custodian services provided by U.S. Trust Company,
N.A.
The Company has retained J.D. Clark & Co. (the "Administrator") to provide
accounting and certain administrative and investor services to the Company. In
connection with such services provided, the Company pays the Administrator a
quarterly fee equal to the greater of: (i) $3,000; or (ii) .00025 of the
Company's net assets as of the first day of each calendar quarter on the first
$150 million of net assets, plus .000125 of the Fund's net assets in excess of
$150 million. For the period from April 1, 2005 to September 30, 2005, the
Company incurred $101,829 in expenses related to such administrative services,
of which $75,000 was payable as of September 30, 2005.
4. Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Investment Funds in which the Company
invests trade various financial instruments and enter into various investment
activities with off-balance sheet risk. These may include, but are not limited
to, short selling activities, writing option contracts, contracts for
differences and equity swaps. However, as a result of the investments by the
Company as a limited partner or member, the Company's liability with respect to
its investments in the Investment Funds is limited to the net asset value of its
interest in each Investment Fund.
5. Investments in Investment Funds
As of September 30, 2005, the Company had investments in thirty Investment
Funds. The agreements related to investments in Investment Funds provide for
compensation to the general partners/managers of the Investment Funds in the
form of management fees of 0.5% to 2.0% (per annum) of net assets and incentive
fees or allocations ranging from 15% to 20% of net profits earned. The
Investment Funds provide for periodic redemptions, with lock-up provisions
ranging from three months to one year from initial investment.
Aggregate purchases and proceeds from sales of interests in Investment Funds for
the period from April 1, 2005 to September 30, 2005 amounted to $30,000,000 and
$18,996,363, respectively.
Excelsior Directional Hedge Fund of Funds, LLC
Notes to Financial Statements (Unaudited) continued
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September 30, 2005
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6. Financial Highlights
The following represents the ratios to average members' equity - net assets,
total return and other supplemental information for the periods indicated:
For the
period from
April 1, For the For the For the For the
2005 to year ended year ended year ended year ended
September March 31, March 31, March 31, March 31,
30,2005 2005 2004 2003 2002
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Net assets,
end of
period $263,481,852 $240,943,784 $173,964,183 $135,036,517 $75,655,074
Ratio of net (0.79%) (1.77%) (1.82%) (1.88%) (2.15%)
investment
loss to
average
members'
equity -
net assets
(a), (b)
Ratio of 0.87% 1.81% 1.87% 1.92% 2.16%
expenses to
average
members' net
assets
(a), (b)
Portfolio
turnover 7.61% 15.61% 22.70% 14.31% -
Total return
(c) 4.11% 4.83% 13.68% (1.98%) 6.98%
(a) Average members' equity - net assets is determined using the net assets at
the end of each month during the period indicated.
(b) Ratios do not reflect the Company's proportionate share of the net
investment income (loss) and expenses, including incentive allocation, of
the Investment Funds.
(c) Total return assumes a purchase of an interest in the Company on the
first day and the sale of the interest on the last day of the period.
Excelsior Directional Hedge Fund of Funds, LLC
Notes to Financial Statements (Unaudited) continued
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September 30, 2005
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7. Bank Note- Line of Credit Facility
On May 2, 2005 the Company entered into a $25,000,000 revolving line of credit
note facility with a U.S. financial institution that is collateralized by the
Company's cash and investments. Based upon the election of the Company, interest
accrues at either the financial institution's prime rate less 1.25% per annum or
Libor plus 1.5% per annum. The note also included a provision for a facility fee
of 0.375% per annum on the unused portion. On September 29, 2005 the Company
borrowed $3,400,000 which is reflected as Bank note payable on the Statement of
Assets, Liabilities, and Members' Equity- Net Assets. For the period May 2, 2005
to September 30, 2005, the Company's interest expense and facility fee
associated with the bank note was $38,583, of which $24,000 was payable as of
September 30, 2005.
8. Subsequent Events
As of September 30, 2005, the Company received subscriptions for Interests from
Members in the amount of $8,820,000, which is reflected as members interests
received in advance on the Statement of Assets, Liabilities and Members' Equity
- - Net Assets. These subscriptions became Interests in the Company effective
October 1, 2005. The Company also invested $10,500,000 in one new Investment
Fund as of October 1, 2005.
9. Guarantees
In the normal course of business, the Company enters into contracts that provide
general indemnifications. The Company's maximum exposure under these
arrangements is dependent on future claims that may be made against the Company,
and therefore, cannot be established; however, based on experience, the risk of
loss from such claim is considered remote.
ADVISORY AGREEMENT APPROVAL
The Investment Advisory Agreement (the "Advisory Agreement") between
the Company and the Adviser had an initial term of two years. The agreement
provides that it may be continued in effect from year to year thereafter subject
to approval by: (i) the Board; or (ii) vote of a majority of the outstanding
voting securities, as defined by the 1940 Act, of the Company; provided that, in
either event, the continuance must also be approved by the Managers who are not
"interested persons," as defined by the 1940 Act, of the Company (the
"Independent Managers"), by vote cast in person at a meeting called for the
purpose of voting on such approval. The continuance of the Advisory Agreement
for an additional annual period was approved by the Board, and by the
Independent Managers, at a meeting held in person on September 8, 2005. The
Independent Managers were assisted in their review of this matter by independent
legal counsel and met in an executive session with such counsel separate from
representatives of the Adviser.
In considering this matter, the Board reviewed various written
materials, including: performance information on and expense ratios of
comparable registered investment companies, including similar funds managed by
the Adviser; and information relating to the costs and profitability of the
Adviser ("Profitability Analysis") from its relationship with the Company. The
Board evaluated and considered: (i) the nature, extent and quality of services
provided by the Adviser; (ii) the investment performance of the Company; (iii)
the costs of services provided and the profits realized by the Adviser from its
relationship with the Company; (iv) the extent to which economies of scale in
costs of providing services would be realized as the Company grows; and (v)
whether the fee payable to the Adviser pursuant to the Advisory Agreement
properly reflects these economies of scale for the benefit of investors.
In considering the nature, extent and quality of services that the
Adviser provides, the Board reviewed presentations from Company management
relating to the structure and capabilities of the Adviser, including information
concerning the qualifications of key personnel, and technology and operational
support, which support the services provided to the Company. The Board concluded
that the Company benefits from the services provided by the Adviser and, in this
regard, took note of the research and portfolio management capabilities of the
Adviser, as well as the Adviser's extensive administrative, accounting and
compliance infrastructure. The Independent Managers noted their overall
satisfaction with the nature, extent and quality of services provided by the
Adviser. They concluded that the Company was receiving all services required
from the Adviser under the Advisory Agreement and that these services were of
high quality.
The Board also considered the investment performance of the Company
and compared the performance of the Company to that of comparable funds,
including other funds managed by the Adviser. The Board concluded that the
Company's performance compared favorably with the performance of similar
registered funds.
The profitability realized by the Adviser was also considered. The
Board relied principally on the Profitability Analysis. Representatives of the
Adviser stated that the Adviser receives no significant indirect benefits from
its relationship with the Company. After reviewing the information contained in
the Profitability Analysis, the Board determined that the Adviser's
profitability from its relationship with the Company was not disproportionately
large so that it bore no reasonable relationship to the services rendered, and
also determined that, given the overall performance of the Company and superior
service levels, the current profitability to the Adviser was not excessive.
The Board also evaluated the fee paid for advisory services, relying
on information concerning the fees and expenses of the Company, which was
contained in the materials provided to the Board. The Board compared those fees
and expenses to the advisory fees and expense ratios of other similar registered
funds of hedge funds, including another similar registered fund for which the
Adviser serves as investment adviser. In this regard, the Independent Managers
noted that the fee payable by the Company to the Adviser and the expenses of the
Company are well within the range of those of similar funds. The Independent
Managers concluded that the fee payable to the Adviser is reasonable in light of
comparative performance and expense and advisory fee information and cost of the
services provided.
With regard to economies of scale, the Board was cognizant of the
fact that economies of scale in costs of providing services may be realized when
there is a significant increase in a fund's assets. The Independent Managers
concluded that, although the net assets of the Company have grown since its
inception, the Company has not reached an appropriate size to support fee
reductions based on economies of scale realized by the Adviser.
Based on the information provided to the Board, and the
considerations and conclusions described above, the Board, including each of the
Independent Managers, determined that: (i) it is appropriate that the Adviser
continue to provide investment advisory services to the Company; (ii) the
advisory fee paid by the Company for these services is fair and reasonable; and
(iii) it is in the best interest of the Company and its members to continue in
effect the Advisory Agreement for an additional annual period.
ITEM 2. CODE OF ETHICS.
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Not applicable for semi-annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
- ------------------------------------------
Not applicable for semi-annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- ------------------------------------------------
Not applicable for semi-annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
- ------------------------------------------------
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
- ----------------------------------
The Schedule of Investments is included as part of the semi-annual report
to Members filed under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND
PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
- --------------------------------------------------------------------------
Not applicable for semi-annual reports.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT
INVESTMENT COMPANIES
- --------------------------------------------------------------------------
Not applicable for semi-annual reports.
ITEM 9. PURCHASE OF EQUITY SECURITIES BY CLOSE-END
MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
- --------------------------------------------------------------------------
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
- --------------------------------------------------------------
There have been no material changes to the procedures by which Members may
recommend nominees to the Registrant's Board of Managers that would require
disclosure.
ITEM 11. CONTROLS AND PROCEDURES.
- ----------------------------------
(a) The Registrant's Principal Executive Officer and Principal Financial Officer
have concluded that the Registrant's disclosure controls and procedures (as
defined in Rule 30a-3(c) under the 1940 Act) were effective as of a date within
90 days prior to the filing date of this report, based on their evaluation of
the effectiveness of the Registrant's disclosure controls and procedures, as
required by Rule 30a-3(b) of the 1940 Act.
(b) There were no changes in the Registrant's internal control over financial
reporting that occurred during the Registrant's second fiscal quarter of the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, the Registrant's internal control over financial
reporting.
ITEM 12. EXHIBITS.
- -------------------
(a)(1) Not applicable for semi-annual reports.
(a)(2) Separate certifications for the Registrant's Principal Executive Officer
and Principal Financial Officer, as required by Rule 30a-2(a) under the
1940 Act are filed herewith.
(a)(3) Not applicable.
(b) Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Excelsior Directional Hedge Fund of Funds, LLC
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By (Signature and Title) /s/ Timothy J. Leach
-------------------------
Timothy J. Leach, Principal Executive Officer
Date December 9, 2005
-----------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Excelsior Directional Hedge Fund of Funds, LLC
----------------------------------------------
By (Signature and Title) /s/ Robert F. Aufenanger
-------------------------
Robert F. Aufenanger, Principal Financial Officer
Date December 9, 2005
-----------------